Educational Articles

Dow 30 Earnings: Cisco Systems Third Quarter Fiscal 2017

Kevin Downing
| May 18, 2017

Network equipment maker and services provider Cisco Systems (CSCO – Free Cisco Stock Report) reported fiscal 2017 April-quarter results that were in line with our estimates (years end July 31st). However, the company also provided weak guidance, which contributed to a significant price decline.

Total revenue of $11.9 billion matched our earlier call and came in 1% lower year over year. Total product revenue was flat, while Services' top line fell by 2%. The consolidated gross margin declined 30 basis points, owing largely to a 130-basis-points drop in product gross margin. Earnings per share of $0.60 beat our $0.58 target and last year's tally of $0.57. Cisco made progress on its efforts to transition to software and services, as evidenced by recurring revenue as a percentage of total revenue rising 200 basis points, to 31%.

Taking a look at individual unit performance, the largest business, Switching, turned positive in the quarter, growing sales 2% versus a 5% decline in the fiscal second quarter. Solid data center switching sales (the ACI portfolio in particular) along with improving demand from enterprise customers helped there. The other large “legacy” business, Routing, experienced a 2% decrease in sales, owing to weak spending on mobile infrastructure products. Meantime, the Collaboration unit's revenue fell 4%, due to weakness in unified communications products. Data center sales were also down, which the company blamed on the continued transition from blade to rack servers. Management mentioned that it is gaining traction with its hyperconverged offering, HyperFlex, though. The Wireless business was the top performer with a 13% revenue advance, thanks again to the cloud-based Wi-Fi solution, Meraki. Finally the Security segment grew revenue 9% and deferred revenue 39%, thanks partly to its large portfolio of products and strong demand. We expect that unit to continue to do well, especially over the near term, as the unprecedented global Wanna Cry “ransomware” brings more corporations to improve threat prevention capabilities.

From a geographical perspective, sales from the Americas fell 4%, Europe, Middle East and Africa declined 6%, Asia was down 2%, and emerging markets posted a dismal negative 12% result.

One of the most disappointing data points from the release was a 10% drop in service provider spending. Elsewhere, sales to enterprises were 2% lower and commercial customers bought 1% less than last year. Still, sales to government entities were down a steep 4% in the period.

The company provided fiscal fourth-quarter revenue guidance of -4% to -6%. The aforementioned weak public sector sales will likely be responsible for one percentage point of the contraction. A lack of Federal budget visibility makes it difficult to predict when this trend will change. Orders in general were lackluster in the quarter, and are expected to remain so in the current period. Less demand from emerging markets and the slowing service provider build outs explain much of this pattern. Currency headwinds in the U.K. and uncertainty in the Middle East over oil prices will likely detract from performance, as well. All told, fiscal fourth-quarter earnings per share are expected to range between $0.62 and $0.68., in line with our $0.64 estimate.

We are moderately concerned by the third-quarter performance, as weakness was widespread across multiple businesses. Although new products and categories are picking up some of the slack created by core technologies, we think underlying demand trends are not where they need to be. Although the shares are a decent choice for income-oriented investors, we see few growth catalysts in the near future.

About The Company: Cisco Systems Incorporated is a leading provider of Internet Protocol-based networking and other products for transporting data, voice, and video across geographically dispersed local-area networks, metropolitan-area networks, and wide-area networks. Devices are primarily integrated by Cisco IOS Software and include Routers, Switches, New Products, and Other. Provides services associated with these products.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.